For state policymakers, Christmas is over. It’s time to put away the gifts, take down the tree and get back to work right-sizing state government so Arizona can start moving again.
Although it won’t help much with our enormous current deficit (about one-third of the general fund budget), Arizona sorely needs a revitalized private sector to get us out of the ditch. But how do we get there from here?
Governor Brewer recently released her plan, a mix of tax reductions and incentives to attract new businesses to the state. Although some parts are troublesome, at least she’s focusing on the private sector, unlike the stimulators in Washington who still think massive government spending can somehow produce wealth.
Probably the most promising of the governor’s proposals is the reduction of the corporate income tax from 7 to 5 percent as well as some other business tax reductions. Downsizing our uncompetitive corporate income tax is long overdue. Unfortunately, in the Brewer plan, the tax reduction isn’t until 2013, when the sales tax increase she successfully advocated for expires.
We need the boost to business now, but you can see the problem. It’s politically awkward to defend cutting business taxes while raising the sales tax simultaneously. The economic arguments for raising the tax during a recession were below weak in the first place. Now we have to wait for it to expire (if it does) before we can get on with this needed economic boost.
The overall weakness of the governor’s plan is that it is overly reliant on government micro-management of the economy. For example, the governor appears unlikely to push for across-the-board cuts to business property taxes, opting instead for expansion of the state’s enterprise zone program.
Now let’s think about this. Enterprise zones are selected by government, usually in economically depressed areas, for special tax treatment. The goal is to make them more productive so they will produce more jobs and tax revenue. But if that works in some areas, wouldn’t the same economic principles apply everywhere? Why not turn the whole state into a giant enterprise zone?
The plan is also heavy on targeted incentives to be administered through the newly created Arizona Commerce Authority. Although details are yet to be fleshed out, the intent is clearly to attract “high value” businesses and “quality” jobs through the use of a deal closing fund.
The strategy is based on the premise that if we take capital away from existing entities in the state and give it to a really smart bureaucrat to allocate among businesses he feels are of higher value, the state economy will receive a net benefit. APS likes the idea so much they are voluntarily kicking in their own money — make that ratepayers’ money — to help get the process started.
But the more you think about it, the less sense it makes. In free markets, capital ceaselessly seeks its own most profitable, efficient use. The chances that government could outsmart the market are vanishingly small, no matter how bright their people are or what tools they use.
Targeted tax cuts not only don’t work in theory, they don’t work in practice either. Steve Voeller of the Arizona Free Enterprise Club points out that Oregon, California, Washington and New Mexico are often cited as regional competitors who are much more aggressive than Arizona in manipulating the tax code to lure new businesses.
Sometimes it works, with triumphal news coverage and politicians happy to take credit for bringing new jobs to their state. Yet Arizona has economically outperformed all those states over the past 10 years.
Oregon, for example, has enterprise zones, a venture capital program, a workforce training program and other cutting edge goodies for new businesses. Yet Arizona’s record on unemployment rates, economic growth and personal income growth outstrips Oregon in all categories.
Successful states stick to the basics. More than anything government needs to stay out of the way. Low, fair, broad-based taxes, a restrained regulatory climate and relief from legal predators send a message to all that Arizona is open for business.
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East Valley resident Tom Patterson (pattersontomc@cox.net) is a retired physician and former state senator.
rrffcc1 posted at 8:20 am on Sat, Dec 25, 2010.
Not mentioned but also needed to attract and retain businesses, and "get back to basics":
1. Excellent, well-funded school systems
2. Property Taxes on homes not hyper-inflated by giveaways on the corporate side.
3. Rational and efficient local and state governments (Yes, "rational")
4. Sensitive and effective support structures for the economically distressed
...and on and on. We're headed in the opposite direction on every one of these. Nice Christmas Day fiction. Arizona's record on these and other civilized issues has never been good, but we're so far from even the best days of it that those days are out of sight, and continue to recede. I guess we're compelled to explore the depths of he*ll yet again before the radicals leave the picked-over corpse and flap away to another roadkill.
Dale Whiting posted at 8:30 am on Sat, Dec 25, 2010.
Dr. Tom,
Good to hear from you again! But who ever said "massive government spending can somehow produce wealth?" I must have missed that lecture in economics class. Rather I recall hearing that government spending and/or tax cuts during times when no one is spending can help restart the economny so that the economy can produce wealth. [Keynes two theories for which he receives credit and blame from neo-cons only on the first] Doctor Patterson, it sort of like a defibralator. Spending restarts the heart beat. Is that so hard to understand?
Generally though, I agree with your other points. "In free markets, capital ceaselessly seeks its own most profitable, efficient use." But as I have pointed out, currently the most efficient uses of capital appear to be in overseas manfacturing. Will these tax cuts raise the tides here or in China? Two Chinese stocks have been listed on the NY Exchange. Isn't that China soliciting our tax cut dollars for the benefit of their pond?
Historically government spending on research and development has lead the way for domestic business development in the technolocy sectors, including medicine. Or did you forget that, too? There is room for both of Keynes' theories. The problems are larger than you may realize!